The coordinated highly manipulated moves by the Fed and BOJ appear to have diverted disaster and moved the DJIA and S&P to new highs. Since the rally out of the 2009 low we had not seen a topping set-up until this year. Since March of 2014 we have had 4 including the most recent one which began on September 19th. Each set-up has mysteriously disappeared. What is interesting is that the time in between each set up is getting shorter and shorter. All across the technical community people are in disbelief but one theme has emerged: the CB’s were aware of the dire technicals and they intentionally tried to avert disaster. The question is have they succeeded? This is not conspiracy theory as the BOJ stated in their press release that they will openly buy their stock market and foreign stock markets. This is in your face open intervention that just happened to occur a day after the Fed ends QE.
This desire by the CB’s to subvert the natural cycles of the stock market and the economy in general reminds me of the Greek mythology tale of Icarus and Daedalus. Daedalus and his son Icarus are trapped on the island of Crete by King Minos. Daedalus is a great inventor and fashions wings made out of feathers and wax to escape from Crete. Before they escape he tells his son not to fly too high because the he will anger the Gods of Mount Olympus and the sun will melt the wax. Long story short the brain dead son Icarus is having a grand time and loves his new found power. He gets so excited he ignores his fathers warnings and flies too close to the sun. The Gods get angered and the sun melts the wax and Icarus plummets to earth and drowns at sea. I knew my Greek mythology class would come in handy someday. My point in telling this tale is two fold:
1) Man can not bend the laws of nature forever. We are not Gods.
2) Icarus represents the stock market. The wax is the debt or leverage that allows him to begin his climb but the higher he goes the more unstable the wax becomes and then poof it melts and we crash.
All stock market advances are due to advancing credit cycles. All credit booms end and when they do so does the stock market advance. What makes this tale so relevant is that the more that CB’s manipulate the market higher and fight nature (Gods) the worse the decline will become once it begins.
Lets go over some math. The longest 4 year stock market cycle in the history of the market was from 2002 to 2009. The advance was 60 months to the top and the total cycle from low to low was 77 months (Longer than other cycles by a wide margin). We are currently in month 68 of this cycle. So unless the they can stretch this cycle longer, which I doubt, it implies the low will occur sometime before July. If we are in a secular bull then the average decline into a 4 year cycle low is 34%. If we are in a secular bear market, which I believe, then we will take out the 2009 low of 666 on the S&P. This bear market will be fast and scary. I know this sounds insane and discrediting but it is what nature demands.
It is likely that Friday was the top of this trading cycle and that a nasty correction is ahead of us. I cite the work of Andrew Kassen at SeeItMarket.com. He is essentially using math to make a prediction that the next move of the market is down and it starts today. The NYMO gave two readings above 80 last week. When two are clustered the average decline following the signal day is -11.1%, the median is -7.4% and the range is from -4% to -30%. The observations have been 9 since 2006 and 8 have resulted in declines that began the day after signal was achieved.
It remains to be seen if we crash but this market is on borrowed time and a nasty bear market is coming and it will be quick and brutal according to the math. The crash is baked into the cake by the Fed and other central banks who have decided to mess with the Gods and have flown to close to the sun. Oh by the way have any of you noticed that the ECRI WLI just dropped to -1.2%. That is a recession warning. We will likely be in a recession by Q1. $80 oil has left much of the energy complexes debt impaired and this will feed into the rest of the credit market. The strong Dollar is not a sign of health but a sign of tightening financial conditions and global deleveraging. Oh by the way oil went down on Friday as the BOJ was shooting bazookas and that to me is a canary in the coal mine that this BOJ endeavor will not alter the path that we are on. Good luck to all. The decline begins soon.
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“1) Man can not bend the laws of nature forever. We are not Gods.
2) Icarus represents the stock market. The wax is the debt or leverage that allows him to begin his climb but the higher he goes the more unstable the wax becomes and then poof it melts and we crash.”
sounds like intellectual bear desperation . nevertheless we will have some change of trend closing to next presidential election
Great Post Blue.
bood,
Dude, its a blog. I don’t take my self too seriously. Of course I could be wrong. But I like my odds and the math. If we bubble up and my cycle count is wrong then I will join you. until then look out below.
I agree with you, and for also other reasons. The only Elliott wave count that makes sense right now is an expanding ending diagonal since July 2014, as there have been multiple 3 wave structures since then, which mean we had to make one final high, and now we have so this week the party should start. Why do you say the low should be by July? How did you come up with that? I see a low in 2016, partly because it seems major lows occur every 42 years(last two were 1932 and 1974, and also it should take at least year and a half or so to make new lows below 6500.
Sorry I see you are saying July so the total cycle is 77 months, but I think this will be significantly longer.
I wonder if you are familiar with david nichols work on bubbles. He shows they initially top in month 64 or 65 which was July. Sometimes they go down right off, but often they linger to form double top in month 69 which in this case is November. Next important point will be February, likely a wave 1 low.
Low oil prices are a plus for the
consumer. Only if multiples of oil companies start going or shutting down will oil
prices rise which will slow consumer
spending . .I think you are early..
Great post though.
Thanks Blue. Are you putting on any positions?
See you at 2300 champ!
How come the bears always sound smarter than the bulls, but are almost always the ones who get punished all the time?
Alltimehighs,
That was an awesome counter argument.
Gorby,
Thanks. Good point but I think its too late for low oil to save the patient.
Billiejones,
I have money losing puts on now. I will layer cash shorts once we get moving.
fiffty2weekhi,
I am not a perma-bear. I would rather be bullish I just call em as I see em. Thanks for the compliment.
nymph,
Thanks
Gideon,
Thanks.
I agree Blue and you have to be nuts buying the market here but we have some junkies who need their fix.
Blue Star, great stuff, as always. You should post more often.
@bluestar i’m ok with your blog, may be bit too soon for a change in the main trend (? – i think so )
bood,
Your differing opinion is welcome here. keep coming.
nautique99,
Sometimes less is more. I will try to pick up the pace.
fifty2weekhi,
Professional bears are the smartest people in the room.
Nice Post Blue! Just a question of when.. The QE bubble has got to be the most obvious bubble of all time.. Does that mean it inflates the highest, or does that mean it bursts the hardest, or both?..
mtpennybags,
Wwe are close and yes the downside will be devastating.
NYA was down -0.34% today. Day one. Andrew is on his game.
When BlueStar gets long, I’m putting on hedges. No offense Blue.
Forget alpha,
No offense taken. I have noticed that you seem to be a rather negative and spiteful person from your past posts. You also feel the need to tell me what to write as well. You have serious control freak issues. Overall you emit a rather odious karma. Karma is a bitch. I suggest spiritual counseling of some sort. I will say a prayer to deliver from what must be an awful sate of existence. 🙂
I’m only negative because I’m tired of reading the same articles over and over again from guys who are absolutely convinced that the market is toast and that anyone with any sense should sell everything and short. Market timing doesn’t work. You keep saying the odds are on your side, but they’re not. You keep talking about cycles, well why not talk about the fact that over the long term, being invested in the stock market has beaten your tactical shorting strategy 9 times out of 10. If you were suggesting us to short specific names like AMZN (you’re single stock posts are by far the most value added) then I’d have nothing to say. But you’ve had about 15 posts now calling a top and each one has been wrong. This is exactly what Dennis Gartman does and it’s bad for the retail investor.
By the way the ECRI called for a recession 3 years ago.
Stock market declines (the devastating ones you keep referring to) are brought on during recessionary periods (i.e consecutive quarters of negative growth) or tight monetary policy and financial conditions. As you note in your post, QE is still alive and well, interest rates are vastly below anything that would resemble a tight environment, and financial condition indicators like the St. Louis fed indicator are perfectly fine. Credit lending is expanding at a double digit annualized rate (the first time in a long time) so there are loose financial conditions for consumers and small businesses as well. Jobless claims are falling, job opening are expanding rapidly, and the commodity complex is reverting to more normalized stronger dollar environments.
But like I’ve sId before, this is what makes a market, and we need guys like you to climb the wall of worry so stocks can continue to climb.
One day we will have a big correction, but none of the major warning signs that existed in 08 are flashing red.
What usually messes things up are fast
hard changes in any thing- today it’s oil.
Companies and countries don’t have
time to adjust and then assets have
to sold often below cost to meet
obligations. As an equity holder I get hurt. If you believe this will continue
become a bear and buy some puts. Me
I’m betting on lower gas leads to more
consumption and maybe I’II buy a bank stock
Forget alpha,
You just proved my point. I usually don’t read things that agitate me. I would suggest that you stop reading my blog because it may be hazardous to your health.
Gorby,
80% of the time I agree there is a bull market somewhere. However, at major turning points fundamentals get overwhelmed. My viewpoint is that we are experiencing an asset bubble like we have never seen. The strength in the $dollar is not a sign of health. It is deflation unless the Fed institutes QE4. The question we need to ask is why did they not extend QE3?
Have to read dissenting opinions Blue, you never know when you might be convinced that your original thesis was misguided
Forget Alpha,
Fair enough. Good banter. I like you for some strange reason.
I like the Greek myth about Little Red Riding Hood and the bear dressed up in grandmother’s clothes. I believe the police arrested that perv.
Just kidding Blue Star, how goes it with the new fund you’re putting together?
Blue ,
Really respect your pov on the market and all of your efforts to prepare those of us who are ignorant to the machinations of the market. I figure the Fed knows shit is bad and will likely wait for a crash/correction before starting another QE , cutting rates and qe are their silver bullets. No need to keep qeing now just wait til after. Seems like the market is trying to leave the bag with someone but with who? Last time was mom & pop investors and mainstreet but they aint in it in like last time. Anyways thanks for all of your informative posts.
Right back at ya Blue good banter as always
Blue, I’m holding a large position in my IRA in Gold/Silver miners mutual fund. Each day it gets “poleaxed” (credit: Fly)
I bought JDST last week and am sitting at a nice gain but still not much compared to the size of losses. Question is: if you were in my situation, would you be adding for long term avg down or get out and try to jump back in later when gold is sub 1000?
Im partial towards just holding and gritting my teeth since i think another round of QE is coming and will weaken the dollar. My head is spinning!
To clarify: I’m holding metals as a hedge against fiat currencies. I think free floating exchanges are still a working experiment in the global economy and people seem to forget such.
Do you agree with this statement or are you bearish because of other reasons?
Always appreciate your dissenting views, but it sure makes it hard to make a decision when you have multiple brilliant guys executing opposing strategies.
Floating exchanges are a working experiment? If you’re basing your investments with this as your main thesis then you might as well just stop wasting your time. You’re only going to want to buy gold, because that’s the only asset which will complement you’re entrenched belief that fiat currencies are worthless. Despite the fact that gold fell in value on pretty much a continuous basis from 1980-2000 (-60%), then rocketed +300% from 2000-2012, and has since plummeted 36%….this definitely sounds like a much better store of value than the reserve currency of the world.
I feel bad for whoever convinced so many investors that they should buy precious metals because the USD is going to zero. The worst part about this is that the bulk of GLD (and other ETF’s as a proxy for precious metals) gathered most of its assets in the last few years.
Come on , i didnt say they were worthless. I said its an experiment. And it is!!!
Money supply increases lead to inflation, thats econ 101 and i would love for you to clarify how our doubling of M2 stock in the last decade spells any kind of strength to the economy. I mean, in order to justify that increase and maintain REAL spending power, wouldnt GDP have to double at the same time?
Im not saying im some prophet with all the answers, im simply putting together the conclusions that make the most sense to me. please, enlighten me of your wisdom. tell me where im wrong!
and i think commodities, not just gold of course, are a store of value in an inflationary time. really, i dont understand AT ALL why the dollar is going up. it makes NO sense to me.
littlefly,
Hit a slight snag but it is coming along.
Daniel kang,
Bag Holders=Pension funds, RIAs, mutual funds, hedge funds. Basically everyone.
the game theorist,
Here is an explanation I sent to someone recently of why the dollar is going to rally:
Why the Dollar will Rally 20-40%.
1) It has happened before. From 1995 to 2001 the dollar rose 46% in 6 years. From 1980 to 1984 it rose 76%. Cyclical bulls within the context of a secular bear market. My view is that we are at the beginning of another cyclical bull. This is not consensus thinking. Besides most asset management firms, leveraged speculators, emerging market and developed countries are positioned for a weakening dollar. Positioning is all that matters and I suspect over time this positioning will shift as the dollar continues to rise until everyone shifts to one side of the boat.
2) Deflation is the number one concern and unfortunately it is intensifying. Many commodity based emerging market countries issued Dollar denominated debt from 2002 until recently. Literally trillions because it was an easy trade. The dollar depreciated until the financial crisis and has basically been going sideways for 6 years. The reason for the current break out it that it is reflecting a giant margin call around the globe. When we create a dollar we create debt (money=debt). From 2000 up until 2008 we were creating more dollars and credit than the world needed and we saw the dollar depreciate. Since 2008 we created even more dollars and credit but it moved sideways because all that the money printing did was to plug the hole created by the demise of the shadow banking system. As global growth slows the demand for dollars increases because debts are repaid or defaulted upon. Once this begins a higher dollar starts to affect the leveraged speculator community (large TBTF banks, other central banks and hedge funds) because they have been using cheap dollars for their carry trade. So what is beginning to occur is a reflexivity process that feeds upon itself. The higher the dollar goes the greater the demand for dollars because debts need to be extinguished and swap contracts need to be unwound. As this occurs financial assets will come under pressure and people will seek the dollar as safety due to its deep liquid market and reserve currency status.
3) Relative to Other currencies best house in a bad neighbor hood. BOJ and Europe are in deep trouble and now Japan with the kamakazi money printing is exporting deflation and has likely set off a currency war. Capital is very scared and is beginning to walk into our markets which eventually will turn into a stampede.
4) Revolutionary Problems in Europe(EU Rebellion): Europe, besides its financial pickle, is experiencing tremendous social unrest and we will likely see the perception that the Euro and the EU could disintegrate. The Mainstream Media downplays what is going on in Europe. There are huge riots and demonstrations occurring all the time. As a result capital will continue to seek the highest ground as this happens. It will be the dollar.
If this plays out quickly we will have a panic. If it plays out slowly it will take several years to unwind.
I think a strong dollar is bad for most financial assets due to this phenomenon except for US treasuries. Plus on the flip side if global tensions continue to build with Russia and China the Powers That Be may want this exact outcome because while not good for most of us citizens the Government would be able to fund itself while China and Russia suffer. The strong dollar is our secret weapon.
Thank you Blue for that explanation. Does this explanation suggest higher dollar does not mean higher short term rates ?
nocturne,
Rates can stay pinned down here for a long time. Credit spreads will widen.
thegametheoristNovember
Commodities are not an effective long term inflation hedge. Commodities generate poor real returns over the long run, and this makes sense because they are high cost inputs that lead to rapid over production as prices rise, and then rapid price destruction when the leverage inherent in each commodity become apparent at the slightest decline of real demand. The financialization of commodities also makes commodities an even less effective hedge in the modern world in my opinion. Commodity exchanges (futures, options etc) were created to hedge certain risks, but quickly turned into trading vehicles. When this idea of allocating a portion of every portfolio to commodities, wall street was all over it, and created a multitude of products that make commodity trading as easy as buying a share of AAPL. This was mainly in the form of ETF’s, which have absolutely exploded in size, greater than what many imagined. So, a huge swath of retail investors (and hedge funds with lousy returns) allocated a portion of their capital to commodity ETF’s (thus the explosion in AUM for the well known GLD for example). But this creates an imbedded risk in many commodity markets because liquidity is vastly less robust or reliable as it was pre-Dodd Frank. The TBTF banks won’t or can’t take on the massive risk positions in the commodity markets like they used to, so in a major liquidity event, there will be no backstop like there used to be. GLD will have to sell (and is selling) its gold contracts into an illiquid market. Then traders will feed on this and short/sell/hedge that commodity and that ETF, knowing that they can exacerbate the selling pressure and make even more money. This hypothetical would be a vicious cycle where selling begets selling, and the commodity ETF that you thought you were buying as a cheap way to get exposure to an inflation hedge, actually just became a massive trading vehicle for hedge funds. Theoretically, I agree that commodities should be correlated with inflation, but the markets are different today, and correlations between commodities in general and inflation tends to be rather short term. So having a long term LONG on commodities in general has never, and will never make any sense. You are betting against human ingenuity, which over the long term is not a great bet.
One other follow up, people also reference the 70’s as proof perfect that oil and gold are great infation hedges because of how they performed in that period of spiking inflation (key word spiking). But the commodity market was an entirely different animal back then. Gold was $230/oz in 1970 (adjusted for inflation) and crude was $20 (also adjusted)…much easier to get the type of returns that gold/crude had in the 70’s when you’re starting from that low.
Commodities futures as an asset class for retail investors is absurd. The are for speculators and for producers to hedge. End of story. Precious metals have some value to investors but again it should be a small part of anyone’s portfolio. Most true gold bugs never touch GLD because they hold physical gold for EOW purposes in which case they believe that Paper gold will be worthless.
Good point on GLD, and yeah unfortunately that fund has syphoned a couple dozen billion of retail assets from FAs putting in a 5% “hedge” for inflation